Strategy

How industry fundamentals dictate dominant sales models in various industries, and why reactive sales may be good for your shareholders

OLYMPUS DIGITAL CAMERAIn many organizations, the hunters, that is, the extrovert sales execs working proactively on new sales deals, are seen as shining stars with brilliant minds (at least as long as they deliver the goods).  The farmers, who tend to be introvert inside sales staff working reactively on smaller deals or deals with current customers, receive generally less kudos.  Indeed, how difficult can it be to wait at the fax machine for new orders, fulfill them once they arrive, and then cash in the meager bonuses typically paid to inside sales?

That said, reactive sales models are widely used and indeed there is today a trend towards inbound marketing coupled with reactive sales models.  What is interesting is that dominating sales models appear to be industry-specific: in some industries, reactive; in some industries, proactive.  It is then of interest to explore why this is.

I would like to postulate that an industry’s propensity for a proactive sales model is driven by the following six explanatory variables:

  • Seller-side preferences:
    • Buyer-side concentration, so that you can do serious prospecting
    • Time of purchase flexibility, so that a prospect is with high probability open for business
    • Low cost of proactive sales rel. to deal size, so that you can afford to pay a visit to customer
    • High contribution margin / low industry maturity, so that there is money to pay for business class tickets
  • Buyer-side preferences, whether in favor of proactive or reactive sales models
  • Buyer-side ability to dictate seller-side’s sales models

Note that seller-side preferences are more detailed than buyer-side preferences, the reason being that whether to engage in proactive sales is a seller-side decision, not a buyer-side decision.

The above six explanatory variables can be combined to form an estimate of an industry-specific propensity for proactiveness (PFP), through the following phenomenological formula:

PFP = (1-BSS) x average(sales-side drivers of proactiveness) + BSS x average(buyer-side drivers of proactiveness)

BSS, buyer-side (negotiation) strength, is here to be understood as buyer-side’s ability to impose a certain sales models, whether proactive or reactive, on the industry.

To what extent does PFP say something about dominating sales models in an industry, as actually observed, or more generally, what is the predictive power of such model?  I have indeed collected data for the above six explanatory variables from 18 industries and calculated PFP.  I have also made a subjective assessment of dominating sales models in the same industry, ranging from pure reactive (=R), to reactive with some proactive elements (= R/P), to proactive with some reactive elements (= P/R), to pure proactive (= P).  Here are my results (sorted first with regard to dominating sales model and then alphabetically):

Industry Propensity for proactiveness Dominant sales model
Hair dressing 0.08 R
Low-end real estate 0.15 R
R&D applications 0.11 R
Second hand cars 0.15 R
Bazaar 0.58 R/P
Defence procurement 0.30 R/P
New cars 0.50 R/P
SW for SMBs 0.44 R/P
Cell phone subscriptions 0.39 P/R
Consulting 0.45 P/R
ETRM systems 0.68 P/R
High-end real estate 0.93 P/R
Platform SW 0.70 P/R
Sales training 0.45 P/R
Financial products 0.84 P
Fine art 0.93 P
M&A services, SMEs 0.93 P
Mining rights in developing world* 1.00 P

*) The purchase of mining rights in a developing country has been considered from the perspective of the purchaser (= the mining company), not the seller (= the government).  The roles of seller and buyer are then reversed.  The model should still work, with the appropriate adjustments, and this example was included to test the robustness of the model.

The model is certainly not perfect, and data collection was not really serious science, but if plotting dominating sales models (subjectively assessed) vs. calculated propensity for proactiveness, there is pretty good fit (dashed line is calculated using linear regression):

blog

Figure: Dominating sales model as function of propensity for proactiveness for the above 18 industries.  (There are not 18 visible markers in the scatter diagram, due to some being exactly on top of each other.)

Not only that, the above model is consistent with the insights that:

  • For most industries (at least to the extent that they become low margin over time), the presence of reactive sales models become more profound over time.
  • Even if margins are falling, the extent of proactive sales does not go down as expected. Instead, good companies are looking for cheaper ways to conduct proactive sales, for example in the form of web conferencing.

NOTE 1: The above model does not fully account for public procurement processes.  These tend to be in principle proactive, in the sense that any bidder for a public project must make a proactive effort to find and develop the opportunity (unless receiving an ITT), but in practice reactive, in the sense of governed by buyer-side purchasing process and not really opening up for typical proactive sales activities.  They are treated as reactive opportunities in this model.

NOTE 2: The above model is clearly simplistic, in terms of both explanatory variables and how these variables combined to provide an estimated propensity for proactiveness.  It also ignores the issue of competition (which drives players in some reactive industries towards reactiveness, to increase margins and / or lower prices; and drives players in some proactive industries towards more proactiveness to capture market share), and the possibility of disruptive business models (e.g., introducing a low-cost reactive offering in a mature market, think dictionaries for those who remember door to door sales men selling dictionaries).

In conclusion, it seems that we can predict dominating sales models in any industry from easy-to-collect industry data, which is an interesting, but not very surprising insight (once you have given it some thought).

And since we talk about reactive sales, here is why your shareholders should be enthusiastic about reactive sales: i) intrinsically high probability of purchase (as such prospective customer is in buying mode, right customer, right timing); ii) high probability of selecting you (if not, he or she wouldn’t have contacted you); and iii) low servicing cost.  No proactive sales opportunity can beat that.

Thanks finally to two of my friends, one a partner in a sales development consulting firm, the other the CEO of a digital advertising agency, who through their fairly contradicting views on sales effectiveness, stimulated the thinking underlying this blog post.

Grim

Discussion

One response to “How industry fundamentals dictate dominant sales models in various industries, and why reactive sales may be good for your shareholders

  1. I loved this, Grim! In my opinion, you’ve found a great way to quantify and model an area which is usually dominated by soft (and not-to-rarely weak) arguments. Thanks for your post and for your insights!

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s